Dead Ahead: America’s Ultimate Budget Battle

If you think last week’s battle of the budget was brutal, wait till you see what’s coming next!

Within just a few weeks, the U.S. government will hit its debt ceiling of $14.29 trillion — and if Congress fails to raise it, the consequences will be far-reaching:

The Treasury Department will be denied legal authority to borrow more money. It will stop payments on bond principal and interest. It will discontinue Social Security checks, cease paying out Medicare benefits, and even cut back veterans benefits — a far bigger blow to millions of Americans than virtually any government shutdown.

In fact, these consequences are so apocalyptic that every time the U.S. government has hit its legal debt ceiling in the past, no one dared to draw a line in the sand. Congress has always voted to raise it.

Will this time be any different?

At first, yes. Fiscal conservatives are now ready to fully deploy the leverage that the debt ceiling gives them. Before they vote to raise it, they’re going to put a big fight and draw some blood.

But no one — not even the staunchest fiscal hawk — is ready for the ultimate budget battle.

That’s the day when Washington finally meets its maker: the global financial markets.

That’s when …

• The Bank of China decides to re-shuffle its massive reserves, greatly reducing its allocation to U.S. bonds …
• The Japanese government issues new guidelines to its large insurance companies and pension funds to cease all further purchases of Treasury bonds …
• Institutional investors in Europe, emerging markets, and even the U.S. dump their bonds with both hands, sell dollars, and rush into every other asset imaginable.

On that day, our fate will no longer be decided by votes on Capitol Hill or last-minute deals in the Oval Office. It will be decided solely on the streets of the world, based entirely on the zeal of investors to cut their losses.

When? No one can pinpoint a date. But there certainly has been no shortage of warnings. For example …

The International Monetary Fund (IMF) warns that, just to regain balance and stabilize the rapid deterioration in the budget, the U.S. government would have to raise all taxes, while cutting all transfers (such as Social Security and Medicare payments) immediately — and permanently — by 35%. Moreover, the IMF warns that any delays in doing so could ultimately make future fixes far more costly.

The Stanford Institute for Economic Policy Research (SIEPR), under the direction of former U.S. Comptroller General David Walker, warns that:

America’s fiscal condition is now actually WORSE than that of two PIIGS countries already known to be extremely vulnerable to this crisis — Spain and Italy!

Precisely when will America have to face the music? No one knows. But Walker and SIEPR stress that …

“The recent U.S. housing market collapse and ensuing financial crisis reminds us that crises usually are both unanticipated and extremely costly.”

The bottom line: The longer our politicians delay action, the greater the ultimate damage to our country.

That’s why nearly one year ago, I stepped up my own warnings, issuing a public challenge to S&P, Moody’s, and Fitch to downgrade America’s long-term debt.

Some experts and readers reacted with alarm and even anger. “Why in the world would you ever want anyone to downgrade our country’s debt?” they asked.

The answer is in the full text of our press release to the major wire services and financial media …

Weiss Ratings Challenges S&P, Moody’s
and Fitch to Downgrade Long-Term U.S. Debt
Downgrade Would Help Protect Investors
and Prod Washington to Fix Its Finances

JUPITER, FL (Marketwire – May 10, 2010). Weiss Ratings, an independent rating agency covering the nation’s financial institutions, issued a challenge today to Standard & Poor’s, Moody’s and Fitch: To downgrade the long-term sovereign debt of the United States in order to help protect investors and prod Washington to fix its finances.

“The U.S. government’s triple-A rating is an anachronism,” said Martin D. Weiss, chairman of Weiss Ratings. “Given the rapid deterioration in our nation’s finances and the spreading threat to sovereign debt overseas, the downgrade is long overdue.

“By reaffirming the government’s triple-A rating,” Weiss continued, “the three leading rating agencies help entice savers and investors to pour trillions more into a potential debt trap, or, at best, to be severely underpaid for the actual risks they are taking. The rating agencies give policymakers a green light to perpetuate their fiscal follies, further degrading our government’s ability to meet future obligations. And they help create a false sense of security overall. Recognizing and confronting our nation’s financial troubles with honesty is the necessary first step toward solving them.”

Weiss presents four case studies in which the rating agencies failed to downgrade large institutions in the past: (1) Major life and health insurance company failures of the early 1990s, (2) the Enron failure of 2001, (3) the mortgage meltdown of 2007-2008, and (4) the failure of Bear Stearns, Lehman Brothers and others in the recent debt crisis.

“In each case,” Weiss points out, “timely downgrades would have been beneficial to investors, to the financial markets and even to the issuers themselves. But in each case, the rating agencies’ procrastination had catastrophic consequences. We can’t afford to let the same happen to our nation’s credit.”

Among the many factors Weiss cites that mandate an immediate downgrade of long-term U.S. debt are:

• U.S. debt and deficit ratios that are equivalent — or even worse than — those of Spain, Portugal and Greece, countries that have already been downgraded by the rating agencies.
• The growing importance of bailouts for sovereign governments, coupled to the inability of the United States to acquire similar emergency financing for itself.
• America’s predicament as the world’s largest debtor nation.
• The U.S. government’s failure to pass its official audit by the Government Accountability Office (GAO) for 13 years in a row, with 38 material weaknesses found in 24 government departments and agencies.

“The case for a U.S. debt downgrade is overwhelming,” concludes Weiss in his open letter to the rating agencies. “And I challenge you to take the appropriate action. Any failure to do so can only enhance the risk of another financial meltdown for which no bailout would be possible.”

(See below for balance of Marketwire text.)

Falling on Deaf Ears

President Obama’s own deficit commission has also issued warnings, which are equally strident.

We hear loud warnings from our creditors in China, the Middle East, and emerging markets.

And most of all, we hear them from the marketplace.

Just this week, for example, global investors voted their extreme displeasure with Washington by dumping dollars.

They sent the greenback into new, multi-year lows against the Australian dollar, the Canadian dollar, and the New Zealand dollar.

The drove the ENTIRE U.S. Dollar Index — representing the dollar’s value against ALL of the world’s six major currencies — down to a meager five points away from its lowest level in history!

Why? Because they see the mess Washington is in. They know how impossible it has become for our leaders to tame our debt monster. They remember how the same thing happened to Greece, Ireland, and now Portugal. Plus, they remember how much money they lost in those disasters!

Meanwhile, global investors fled to virtually every investment that typically surges as the dollar falls. That’s why …

• Gold is exploding higher, quickly closing in on the $1,500-per-ounce level.
• Silver has busted through the $40 level — doubling in the past seven months alone.
• Crude oil has jumped by more than $10 per barrel in just over a week. On Friday, it surged to more than $112 in the U.S.; $126 in Europe.
• And the dollar collapse is even inflating U.S. stock prices — especially those tied to resources or benefiting from booming currencies and economies overseas.

Yet despite all of these warnings — from the experts and from the markets — Congress and the White House continue to fiddle.

Good luck and God bless!

Martin

Balance of Marketwire text is below …

Weiss Ratings is the nation’s only provider of independent ratings on the nation’s 900 life and annuity insurers, 2,700 property and casualty insurers, as well as 600 health insurers and HMOs. It is among the nation’s leading providers of independent ratings on 8,000 banks and S&Ls. Plus, it also distributes independent ratings on the shares of thousands of publicly traded companies, mutual funds, closed-end funds and ETFs.

By adhering to its independent business model, Weiss outperformed Standard and Poor’s, Moody’s, A.M. Best and Duff & Phelps (now Fitch) in warning of future life and health insurance company failures according to a 1994 study by the U.S. Government Accountability Office (GAO), while also outperforming its competitors in identifying the safest insurers, according to its follow-up study using the GAO’s research methodology.

Similarly, Weiss was the only one to identify, in advance, nearly all major banks that failed or required a federal bailout in the 2008-2009 debt crisis. (See Weiss warnings of financial failures in debt crisis of 2008-2009.)

Thanks to its strong track record and independence, The New York Times wrote that Weiss was “the first to see the dangers and say so unambiguously”; Barron’s wrote that Weiss is “the leader in identifying vulnerable companies;” and Esquire concluded that Weiss Ratings is “the one company [that]… provides financial grades free of any conflicts of interest.”